Money in Motion

Gordon: Why the Euro Still Has Room to Rise

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The following post is a Guest Blog by CNBC Contributor Todd Gordon.

Heads are still spinning from Thursday's monster move higher in EUR/USD following the ECB decision to keep rates on hold. As we discussed during the press conference on Trader Insight yesterday, Draghi started the conference with a downbeat assessment of the developed EU economies (i.e. Germany) as we expected and EUR/USD traded with an offered tone.

Then once the press conference completed and the Q&A began, the fireworks started going off.

Here is one exchange:

Question: I have two questions. Can I press you again on the discussion in the Governing Council? You said the decision was unanimous, but last month we had a significant amount of support for a rate cut and I find it quite hard to believe that this was not there this month. Was it there? And you have people like your former colleague, Mr Orphanides, who basically said that the current confidence swing is merely a lull in the crisis brought on by the OMT, and with unemployment being at a record high, the recession is actually worse than in 2009, so he would say that you should cut rates…..

Draghi: I have already answered the first question. Since our last assessment there has been nothing that has made us change our medium-term assessment of price stability. And any signs we have seen since then are signs of financial market stabilisation, if not a return of confidence, and a broad stabilisation in conjunctural indicators. That explains why we now have unanimity. But there was no reason to change the decision taken last month….

Question: Were there calls for rate cuts today?

Draghi: I said it was unanimous.

Question: You said that the decision was unanimous, but what about in terms of the discussion? The markets want to know what the mood on the Governing Council is.

Draghi: If the decision was unanimous it implies that there was no request for a rate cut. One thing implies the other.

So you can see Draghi defended that point quite vigorously and EURUSD took that as a sign to rally. But why such a massive move? Stepping back from yesterday's press conference, there are some deeper economic developments that support a higher EUR/USD.

As you know we do not project future price trends, and most certainly do not initiate trade alerts based on fundamental data. What we do is take the fundamental data and stories that market participants are focused on, enter it into our trade equation, and then filter it through the lens of the Elliott Wave Principle and determine if overall market participants are underweight or overweight in the position. If we determine the market is in an early phase and not extended during a bullish move, we'll join the trend. If we determine the market to be overweight based on a bullish fundamental theme and the trade is crowded, we look to be on the opposite side and look for counter-trend trade - despite the fundamental theme being bullish.

UBS Investment Bank put out a nice piece this morning showing the fundamental conditions in Europe are improving as evidenced by narrowing bond spreads against Germany. Moreover, the ECB's interest rate has a tight relationship with Purchasing Manager Index data (PMI), which has turned up in recent months.

So you can see markets are digesting some bullish fundamental data from the euro zone. The question now becomes, is the bullish fundamental theme fully priced into the market and we find ourselves in a crowded trade, thus longs should be avoided? Or has the market not yet fully expressed its positive opinion and there are tickets still available on the bullish boat for a cruise higher? Let's filter it through the lens of Elliott Wave and pinpoint our exact location in the prevailing price trend.

EUR/USD - Daily: If we can clear the .618 Fib projection level of 1.3359, then it's clear sailing up to the 1.0 Fib projection level 1.3790. The trade is not yet crowded.

Todd Gordon is co-head of research and trading at Aspen Trading Group and a contributor to CNBC's "Money In Motion.".

No disclosures.

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